Wednesday, August 1, 2012

Monti's race against time

Italy’s Prime Minister Mario Monti is in a race against time. He needs to secure government funding via a pan-Eurozone bond buying program before Italy's economic conditions deteriorate further.

Bloomberg/BW: - Italy’s Prime Minister Mario Monti is pressing his European counterparts to sign on to collective action to fight the financial crisis, trying to bridge a north- south divide in the euro area for help to lower borrowing costs.

Monti, who is due in Helsinki today for talks with Finnish Prime Minister Jyrki Katainen, is seeking to capitalize on a pledge by European Central Bank chief Mario Draghi to do whatever it takes to defend the euro. Bundesbank President Jens Weidmann said the ECB shouldn’t exceed its inflation-fighting mandate, according to an article published on the German central bank’s website today.

He has a reason to move quickly. The onset of Italy's deep recession may damage the nation's fiscal conditions as tax revenues decline. Without a backstop from the Eurozone (ESM and ECB) it may become increasingly difficult to roll government debt. With over €100bn of bonds to roll this year alone, this backstop becomes critical. And the latest economic indicators from Italy are showing a further deterioration.

Manufacturing PMI (source: Markit)

Source: DB

Markit: - "July saw the recession in the Italian manufacturing
sector extend to a year. Moreover, the downturn
was shown to have deepened as the PMI sank to
its lowest level in three months, primarily reflecting
a sharper reduction in staffing levels. A solid and
accelerated decrease in stocks of purchases also
dragged the headline index lower, and suggested
that firms had grown more concerned about cash flow and were not anticipating a rise in production
requirements in the near term."